Fixed versus adjustable rate loans

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A fixed-rate loan features a fixed payment over the life of your mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally monthly payments for a fixed-rate mortgage will increase very little.

When you first take out a fixed-rate mortgage loan, the majority the payment goes toward interest. The amount paid toward your principal amount goes up slowly every month.

Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers select these types of loans when interest rates are low and they wish to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at the best rate currently available. Call Sierra Pacific Mortgage at (844) LEND-USA to learn more.

Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, interest on ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs feature a "cap" that protects borrowers from sudden increases in monthly payments. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees your payment won't increase beyond a fixed amount over the course of a given year. Most ARMs also cap your rate over the duration of the loan period.

ARMs usually start out at a very low rate that usually increases as the loan ages. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are often best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs most benefit borrowers who will sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs choose them because they want to get lower introductory rates and don't plan on staying in the house for any longer than the introductory low-rate period. ARMs can be risky if property values go down and borrowers can't sell or refinance their loan.

Have questions about mortgage loans? Call Andrew Del Rey or Todd Avakian at (888) 888-1172. It's our job to answer these questions and many others, so we're happy to help!